Debt Review: The Good, the Bad and the Toxic – Part 3

We’ve covered “The Good” and we’ve covered the “The Bad”. And while there are several types of toxic debt we could talk about (payday loans for example), this post will focus on the more commonly used high rate credit card.

Let’s Face It. Credit Card Companies Don’t Give Us Much Respect.

They know:

If they offer us airline miles, 0% introductory rates and a discount at Target, we are definitely going to use their cards.

We’ll buy items that we otherwise wouldn’t purchase with cash.

Once we’ve purchased these items, we won’t pay them off at the end of the month.

We won’t look closely enough at the Annual Percent Rate (APR) when signing up for the card.

We won’t calculate the negative effects the high rates are having on our ability to repay the balance.

Unfortunately, they are right. The one thing credit card companies aren’t is stupid. They know exactly what they’re offering and they know exactly how we’ll misuse their product.

So What Are Your Choices?

Option 1: Stop Using Them Altogether: This is a great option. Sure, your credit score can benefit from using a card on a regular basis and paying it off every month. But if you find that you are simply unable to control your spending, you are better off shredding all of your cards and refusing to use them.

Option 2: Pay Them Off Every Month: This is the only way to properly use credit cards. I’m a huge fan of the Southwest Visa cards. I currently have one for each of my businesses as well as a personal one. They are each set up with automatic recurring payments, so they get paid off every month with zero effort. And the best part is that I haven’t paid for a Southwest flight in over two years!

Option 3: Misuse Them: Unfortunately, this might be the most common way to use credit cards. Since most cards have rates that range between 15 – 30%, you will really be digging yourself into a hole by carrying balances on them. The 5% you save on purchases simply isn’t worth the 22% you’re paying in interest each year on the balance.

How to Get out of Credit Card Debt:

If you’ve found yourself upside down in credit card debt, there is often only one way to get out of it without trashing your credit. Simply suck it up and do it. Pour all of your extra money into paying them down.

Consolidating your credit cards and/or taking out a second mortgage on your home are very dangerous options. If you haven’t corrected the bad spending habits that got you into the situation in the first place, you’re likely to just run your card balances right back up. This will only result in having the same balances you previously had with a larger mortgage payment to accompany them.

If you need an action plan for your debt, we’d love to help. Yes, it’s better for you if you can come up with your own solution. But if you just can’t seem to get a grasp on it, some professional help will go a long way.

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Tim Plachta, CFP® owns and operates Reliant Wealth Management and Reliant Consulting Partners. He works primarily with small business owners to help them increase profit, reduce their workload (so they can relax more), and invest enough of their earnings to achieve financial independence.